Saline Motor Co. v. Commissioner ( 1931 )

SALINE MOTOR COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Saline Motor Co. v. Commissioner

Docket No. 43095.

United States Board of Tax Appeals

22 B.T.A. 874; 1931 BTA LEXIS 2052;

March 20, 1931, Promulgated

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">*2052 CAPITAL EXPENDITURE. - Petitioner's incorporators paid $9,337.07 for the tangible assets of a going concern and an additional $5,000 for which they acquired a Chevrolet dealer's contract, the going business, and the good will, if any, which were turned over to petitioner upon its incorporation. Held, that the $5,000 was not a deductible business expense, but a capital expenditure.

Allen H. Gardner, Esq., and Herman T. Reiling, Esq., for the petitioner.

P. A. Bayer, Esq., for the respondent.

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TRUSSELL

">*874 The petitioner contends that the respondent, in determining an income tax deficiency in the amount of $590.81 for the calendar year 1926, erred in disallowing $5,000 as a deduction from gross income as a business expense.

FINDINGS OF FACT.

In 1926 the Mofield Motor Sales Company was engaged in selling Chevrolet automobiles, parts, and accessories, and it also conducted a repair shop, in Harrisburg, Ill. It was an authorized Chevrolet dealer pursuant to its contract with the Chevrolet Motor Company, which expired in August, 1926.

Prior to the organization of the petitioner its incorporators ascertained that the Chevrolet Motor">*2053 Company was seeking a new dealer in Harrisburg and the officers of that company assured them of a dealer's contract commencing in August, 1926. Petitioner's incorporators were of the opinion that the Mofield Motor Sales Company did not have a good business reputation nor good will, but in order to commence business immediately they purchased for $14,337.07 in cash, the assets and going business of that organization pursuant to the following agreement:

Memorandum of agreement made and entered into this 5th. day of May A.D. 1926. by and between the Mofield Motor Sales Co. party of the first part and R. C. Burnett-Wm. Bradshaw-and D. B. McGehee-parties of the second part to wit:

">*875 The party of the first part agrees to sell and the parties of the second part agrees to buy all of the new Chevrolet cars, parts and accessories, shop equipment, office equipment belonging to the party of the first part and pay for same at net cost to the first party, less a reasonable deduction for depreciation on used equipment.

It is further agreed by and between the parties hereto that said second parties shall pay party of the first part for the good-will of the said first party the sum">*2054 of Five Thousand Dollars ($5,000.00)

It is further agreed that this agreement is made and is to be subject to the approval of the Chevrolet Motor Co. and with the understanding that should said Chevrolet Motor Co. refuse to allow the said parties of the second part the right to sell Chevrolet cars in the City of Harrisburg that this agreement is void.

It is further agreed that this agreement supersedes and replaces agreement dated May 4th. 1926 and upon attaching signatures of all parties hereto the said agreement dated May 4th. shall be and is considered null and void.

It is further agreed that the parties of the second part will lease from E. L. Mofield the Garage now occupied by the party of the first part for a term of (5) five years at a rental of $250.00 per month.

MOFIELD MOTOR SALES CO.

W. H. MOFIELD. R. C. BURNETT W. W. BRADSHAW D. B. MCGEHEE

Those three individuals took immediate possession of the assets and operated the business until May 18, 1926, when they turned the assets and the going business over to the petitioner which has continued the Chevrolet sales business and the repair shop at the same location. In August, 1926, petitioner secured a">*2055 new contract with the Chevrolet Motor Company.

OPINION.

TRUSSELL: The petitioner contends that pursuant to the agreement of May 5, 1926, it acquired automobiles, parts, accessories, and machinery at a cost of $9,337.07 and a Chevrolet dealer's contract expiring in August, 1926, at a cost of $5,000; that the Mofield Motor Sales Company had no good will of any value; that the said $5,000 was paid merely for the privilege of doing business from May to August, 1926, and constituted a deductible business expense for that year.

We have heretofore held that in a capital transaction such as that involved in this proceeding, an amount paid in excess of the value of tangible assets purchased is not a deductible business expense, but constitutes a capital expenditure. Cf. ; ; .

In his brief counsel for petitioner contends, in the alternative, that since no good will was acquired the $5,000 represents the cost ">*876 of a contract which had a life of about four months within the taxable year 1926, ">*2056 and that such cost should be written off during that year. In our opinion the said $5,000 was not paid solely for the Chevrolet dealer's contract. The Mofield Motor Sales Company was a going concern and petitioner's incorporators paid $14,337.07 to purchase it. The amount of $9,337.07 was paid as the value of the tangible assets used in that business and an additional $5,000 was paid to secure the going business, the Chevrolet dealer's contract, and the good will, if any, attached to that established and going automobile sales and repair shop business. We think it immaterial that petitioner found the good will to be of little or no value, for the assets and the going business of the Mofield Motor Sales Company were purchased as a whole and we see no basis for apportioning the $5,000 between the Chevrolet contract, the good will, if any, and a bonus for the going business.

Judgment will be entered for the respondent.